China reports slowest growth rate in 3 years

China's 7.6 percent growth rate is the lowest in three years – but the country's economic problems appear more dire than the latest numbers indicate. Some believe the government will counter the downturn with a massive stimulus package, a strategy that has left China's local banks saddled with bad debt in the past. NBC's Ian William reports from Beijing.

By Ed Flanagan, NBC News

BEIJING – China's economy grew at its weakest pace in three years, the government reported Friday.

According to the National Bureau of Statistics, Gross Domestic Product grew at a 7.6 percent rate in the second quarter of 2012, down from a 8.1 percent pace in the first quarter and marking the sixth consecutive quarter of slowing growth on the mainland dating back to 2009.

The data were in line with official government projections for the quarter although they serve as another reminder that China's economy is slowing faster than the government had hoped.

China is under enormous pressure from abroad and at home to maintain steady economic growth. Amid worrying economic numbers out of the European Union and the United States, China is increasingly viewed as one of the few motors strong enough to power the global economy through this financial turmoil.

Meanwhile, here on the mainland, the ruling Communist Party has seemingly staked its legitimacy to an unspoken pact with its citizens: give up some social freedoms for continued economic prosperity.

“For the past 30 years, the Communist party derived a lot of its legitimacy from delivering the goods: better economy, better living standards,” says Patrick Chovanec, a professor of economics at Tsinghua University in Beijing, “If the perception is that's changed, then it introduces a real element of uncertainty.”

This relationship was probably best manifested at the end of 2008 when global trade ground to a halt and the country hemorrhaged nearly 20 million jobs. Beijing responded with a 4 trillion yuan ($635 billion) stimulus program that opened up lending from Chinese state banks.

The move helped kick off growth across the country as local governments went on a construction frenzy from new ports and airports to ambitious housing developments.

Internal problemsBut the free-wheeling loan binge – often to state-owned enterprises with opaque accounting practices – may have helped foster the environment for today’s economic slowdown by providing a potential crush of bad loans that might very well brutalize the economy.

“In 2008, the big problem was external, a slowdown in exports.”Chovanec told NBC News, “This year the problem is internal. It's bad debt, and the burden the bad debt is placing on the economy.”

With the government having to prepare to potentially step in and fill the holes in the national balance caused by bad debt, there is simply less money available in Beijing’s coffers to propel the economy out of its current doldrums.

“In many ways, they've pinned themselves to a corner,” says Chovanec, “They had this big stimulus over the past three years that kept China's GDP growth higher compared to the rest of the world, in the face of the global slowdown… But that caused twin problems of rising inflation and bad debt.”

“Particularly with bad debt right now - that problem's coming home.”

Believe the numbersIn addition, although the GDP shows a growth rate that would be the envy of any developed economy right now, there is growing cynicism over the veracity of the official economic figures being released by Beijing.

“There's a lot more skepticism today about Chinese official numbers, and I think it's reflective of the fact that you've got a very clear and very serious slowdown taking place in China,” says Chovanec, who noted that while figures show extraordinary high rates of private sector investment and profit gains this year, the numbers simply don’t jibe with what he’s seen in the field.

Nowhere is this disconnect more apparent than in China’s housing and construction industry.

A mere 75 miles away from Beijing resides the foundations for one of the grand-scale property developments that have been the hallmark of the boom times here in China. Conceived in 2004, Jing Jin City derived its name from the ambitions of its developers who envisioned constructing a city between the capital Beijing and the important nearby port town of Tianjin that would attract rich investors with business in both cities.

Touted by the developers as the biggest villa development in China, Jing Jin City was a $3 billion investment designed to eventually become home for half a million people. Really a satellite city of Tianjin, the city government there had aspirations of Jing Jin eventually becoming a new Manhattan.

However, as credit has dried up and speculators have now shown reluctance to sink money into risk property developments, Jing Jin City is effectively a ghost town, a surreal mixture of luxury homes that would look natural in any tony suburb in the United States and the ghostly skeletons of those only partly-built.

Surrounded by farmland, Jing Jin City’s wild underbrush and small lakes on the outskirts have become a popular place to water and feed the dairy cows from a nearby dairy.

“I haven’t seen many people around here,” said one farmer who was tending to his cows this week outside one unfinished construction phase, “I guess people think it's too far away from the cities.”

With a primary Chinese engine of economic growth via construction in trouble, those economic woes spill over into the over 40 industries that are tied to the property industry.

As a result, local governments are said to be facing increased pressure to cook their books in order to offer a rosier view of the economic environment in their regions.

That this doctoring of economic figures may be occurring is not a surprise in China where economists and even senior Communist Party officials –mostly famously the expected future Prime Minister, Le Keqiang – have long believed that the provincial economic numbers are unreliable.

However, the New York Times last month reported that many of the economic indicators that economists and the Chinese government rely on to determine GDP growth – electricity usage, coal stocks, freight movement, etc. – may also be altered by local governments.